Thursday Options Outlook: XOM, DELL, V, XLB, WIND, WERN, JOYG, PAET, MAS

by: Interactive Brokers

Exxon (NYSE:XOM) – Shares to hit $100 by July? Whether a natural outgrowth of the recent days’ urge higher in futures prices or a reactionary stunt on back of this morning’s sharp drop in oil stockpiles, it’s tough to say. But with Exxon shares flat-to-lower at $90.37, it beggars closer scrutiny that some three-quarters of the 78,000 actively deployed Exxon options on our platform today are situated at the July 100 call line, most of these bought on the offer for 60 cents apiece. For delta-watchers playing along at home, that premium reflects a 14% probability in the option market that Exxon shares can shatter the $100 level – an all-time-high for the stock – by July 18.  

Dell (NASDAQ:DELL) – Dell numbers due out after the bell has option traders deploying more than 54,000 option contracts this afternoon as shares make good on a .23% gain to $21.74. The buzz around Dell has been largely positive heading into these numbers –  Bloomberg News noted earlier today that 9 out of the company’s 10 largest investors added to their holdings over the past quarter, suggesting a high level of confidence in the efficacy of Michael Dell’s three-year retrenchment program. The fact that calls are outmoving puts by a factor of 1.7 at this hour also lends credence to the upside thesis on Dell. The price of the closest-to-the-money straddle at $1.67 suggests as much as a 7% move being priced into the options right now, as heaviest volumes are occurring in June calls at strikes of 20, 21 and 22.  

Visa (NYSE:V) – News of a boost in Mastercard’s (NYSE:MA) anticipated growth target for 2008 had a knock-on effect – an orgiastic one, in fact – in shares and options of Visa, which has long been a favorite object of option speculators. Shares rose 5% to $86.02, putting Visa within about $4 of its 52-week high as an attending 17% spike in implied volatility to 46% suggests there’s more where this latest turbulence came from. The fact that traders are eyeballing puts 7 times as often as puts suggests that this volatile price risk lies to the upside, and indeed, we are observing buying with relative abandon in June calls at strikes of 80, 95, 90 and 95.

Materials Select Sector SPDR (NYSEARCA:XLB)  – Shares in the metals and mining ETF, whose components include US Steel (NYSE:X), Newmont Mining (NEM), Dow Chemical (NYSE:DOW) and Monsanto (NYSE:MON) among others, are flat-to-lower at $44.44 ahead of the noon, and its 96,000 active option contracts have designated it not just as an absolute volume leader but represent more than 4 times the normal level. The conspicuous gluts of volume trading in June puts at the 42, 43, and 44 strike levels traded overwhelmingly to sellers. The long interest occurred at 41 and 42 puts strikes in the front month, and again at the 44 calls, these commanding $1.30 per contract), which may or may not be involved together in long-volatility strategies. In any case, the upshot of all this activity is that option traders believe the XLB may be on the cusp of a change in its price regime for the year to date – a regime that has kept shares bound in a $10 range from $36-$46 since January.

Wind River Software (WIND) – Option traders had little trouble making up their minds about Wind River Software, the maker of so-called “decision support” software, embedded systems, and middleware used in everything from the Mars Rover to city traffic signals. Wind River is due to report earnings after the closing bell today, numbers coming after two consecutive quarters of earnings misses. What interested us today was the 20,000 lots trading at the out-of-the-money June 7.50 put strike – this volume totaling 5 times the open interest on *all* Wind Systems options. Curiouser still was that most of these contracts sold to the bid for 10 cents, suggesting no great exodus of traders seeking shelter against precipitous declines, but possibly traders taking a dime premium to take advantage of pumped-up pre-earnings volatility (at 49%, the implied volatility reading suggests more than 50% added price risk to Wind Systems shares over the next month). The company has traded as high as $13.42 and as low as $8.80 over the past 52 weeks.

Werner Enterprises (NASDAQ:WERN) – Options in Werner Enterprises, the over-the-road trucking giant focused primarily on interstate commodities hauling, are trading at 7.5 times the normal level today as its shares read flat at $18.65 over the noon hour. There’s no apparent news catalyst specific to Werner that we can discern, but what is noteworthy is an early-session 20% spike that sent implied volatility to 45%, hinting that the relative inaction in its share price may not stick around and a new bump in the road may lie ahead. The fact that today’s option trading activity was tied up in front-month put buying at the June 20 strike for $1.85 would indicate that this risk lies to the downside. Overall, the activity in Werner Trucking this morning matched up to nearly 30% of its open interest.

Joy Global (JOYG) –Shares in Joy Global, the maker of P&H Mining Equipment and Joy Mining Machinery, staged an impressive 4.7% gain to $81.59 after the company raised its sales and profit guidance for 2008. In sifting through the analyst talk about this company, we noted that Joy Global also offers equipment and services involved in the extraction of so-called “sands oil” (that labor-intensive, bituminous oil out of Canada that’s drawn redoubled attention as high oil prices have suddenly made even very sticky, cantankerous oil varieties seem attractive). We wonder if this may explain the 4-fold increase in option trading activity we observed this morning, with adamant buying interest in June 85 calls. There may be some evidence of call spread activity in the July contract, where 75- and 85-strike calls are all trading to the middle of the market – and if that’s so, could indicate some inclination on the part of traders to tamp down exorbitant upside speculation over the next 2 months.

PAETEC Holding Corp. (NASDAQ:PAET– Flat-to-higher share price action in PAETEC, the alternative local communications services provider, has the $8.35 share price sitting at around a $2 premium to the 52-week low. It was an increase in its options activity to more than 92 times the normal level that ticked our market scanners, however, owing to a 3,500-lot credit spread occurring in the June puts. Here it appears that a trader bought the June 5 puts for 10 cents, paying virtually a drop in the bucket against the $6.80 he or she pocketed on the sale of deep-in-the-money 15-strike puts for $6.80 (indeed, 80% of the present share price).  The resulting $6.70 credit represents the maximum profit this trader will ever reap, assuming both positions expire worthless, as he or she wants time value to whittle the spread down ever narrower.

Masco (NYSE:MAS  For a second consecutive session, out-of-the-money call buying in Masco, the maker of cabinetry and builders’ hardware, has landed the company on our list of “Hot by Options Volume” movers. Again it’s calls at the 25 strike that are in focus, bought today in the October contract for 35 cents, sending trading volume to 5 times the normal level, flying directionally in the face of downside share price action in the underlying stock (Masco shares are down 1% to $18.12, loitering within $1 of the 52-week low).  We wonder if the past 2 days’ call buying action in Masco comes down to the covering of short positions, given the out-of-the-money strikes involved – and in light of the fact that at 47.3 million shares, Masco’s short interest stacks up to some 13% of the float. In terms of overall open interest, puts outweight calls by a factor of 2.5.

Rebecca Engmann Darst contributed to this report.

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